Measuring equity funds performance


We are discussing in this article how top performing Mutual Funds work in investing in stocks for getting maximum benefits for their investors. The examples are taken from Indian companies as the Indian Stock Exchanges are currently making an impact on other stock exchanges of the world. The strategies followed by other Global Mutual Fund companies may be more or less the same because they invest in all over the world stock exchanges.

Mutual funds select a specific stock market index as a benchmark based on the index meeting the fund’s investment objective and strategy. Benchmarks are usually decided based on the fund’s investment objective, style and approach. For example, the Sundaram India Leadership Fund has the Nifty as the benchmark index since the fund’s investment philosophy of investing in leaders in sectors matches the constituents of Nifty. In case of another Fund from the same group, they have chosen BSE500 since the Fund invests across market caps and this index represents all market caps.

Mutual Fund schemes are conceptualized on the basis of certain assumed investment objectives to participate in different segments of the market. In case the scheme is formed to focus on large cap companies. It would either have the Sensex or the Nifty as the benchmark. Schemes focusing on mid caps would be linked to the CNX Mid cap Index as the scheme objective is to invest in madcap companies.

When stocks forming the Bench mark index change,

In order to ensure that a stock market index remains stable and there is continuity in its representation, the stock exchange has to actively maintain the index. Maintenance results in changing stocks that form the index. For instance, between 1986 and 2005, the BSE Sensex has had 42 scrips being replaced. Similarly between 1996 and 2006, the S&P Nifty has had 43 replacements.

So what do mutual funds do when the index undergoes a change?
When the constituents of a benchmark index undergo a change, we verify whether the objective is met through the revised constituents or not. If not, we will change the benchmark. For example, a Mutual Fund equity company select Midcap had the CNXMidcap200 as the benchmark earlier. When the constituents were changed in 2005 and consequently the characteristic of the benchmark no longer represented the company’s Midcap’s objective, because they shifted their benchmark to the BSE Mid-cap Index.

Top Performers:

Popular stock market indices used as benchmarks by equity diversified funds re the BSE Sensex, the S&P Nifty, the CNX500, BSE100 and BSE200. Among these, the Sensex and the Nifty are used the most (about 31 funds have used the Sensex as a benchmark and about 33 funds have used the Nifty as a benchmark).

An assessment made of the performance of schemes vis-à-vis the returns of their benchmark indices, indicates that the top performing scheme (amongst all the schemes using a common benchmark index) has outperformed the benchmark index with a wide margin for all time periods considered. For instances, among the schemes using the Sensex as a benchmark in the 3-month, 6-month and 1 year time periods, the Tata Infra –structure Fund has been the top performer and has beaten the Sensex with a margin of more than 9%, 21%and 13% in these time periods respectively.

Mutual fund portfolio should encompass the range of funds across different market capitalization—large, mid and small This is identified from the index the fund benchmarks against. For example, large cap funds would normally benchmark against the BSE SENSEX or S&P CNX Nifty mid cap funds against the BSE 200 or Nifty 100 and small cap funds against the BSE 500 or NSE 500.When selecting funds, check which index is the fund benchmarking against and choose the well performing ones that’s able to consistently outperform this benchmark. This approach will allow the investing Mutual Fund companies to participate in the overall growth of Indian economy and companies.